State, Cities in Next Round of Redevelopment Fight

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A second round of bureaucratic bickering has begun over the dismantling of California's community redevelopment agencies.

Nearly 70 lawsuits filed by local governments, developers and affordable housing advocates remain active and are challenging how much redevelopment money the state can claim and redirect to local government entities.

A hearing in one of the most far-reaching lawsuits was held Friday, with a ruling expected within 90 days. That lawsuit, led by the League of California Cities, focuses on whether the state finance department can withhold property and sales tax revenue from cities if the parties disagree over the amount of redevelopment money owed to the state. ``It's not slowing down,'' said Patrick Whitnell, general counsel for the league.

"I fully expect that lawsuits will continue to be filed for the foreseeable future.'' Gov. Jerry Brown led a push in 2011 to dismantle redevelopment agencies, which were established after World War II to combat urban blight.

The state wanted the property tax revenue they generate to be redirected to local schools, law enforcement and other services to relieve pressure on the state's general fund. In December 2011, the state Supreme Court upheld the Legislature's right to eliminate the more than 400 redevelopment agencies statewide.

Since then, however, the state has had a hard time redirecting the redevelopment property tax revenue to local entities because cities say they need the money to pay for a variety of projects to which they have already committed.

While the lawsuits play out, the state controller's office is reviewing the assets that were transferred by redevelopment agencies after the governor announced his intent to dismantle the agencies. Among its findings so far, the controller has found that Fresno inappropriately transferred $41.5 million to the city's housing agency and San Jose improperly transferred $148 million.

The audits suggest that the cities should not have kept that money for their own use but rather should have surrendered it to be distributed among various local government entities, as the Legislature intended. In response, state finance officials have sent more than 40 letters warning cities that the state will begin withholding sales tax revenue if they do not transfer the amounts the state says they owe.

Department of Finance spokesman H.D. Palmer said withholding tax revenue was a last resort and that the state would rather negotiate with the local governments.

The Legislature gave the finance department the power to withhold tax revenue after the Supreme Court ruling.

The League of California Cities views it as an unlawful raid on local government coffers.

"Property tax and sales taxes are the two biggest and most important revenue sources for cities,'' Whitnell said. `"f they lose that, particularly if it's any significant amount, that's going to affect their ability to meet other obligations.''

The league's lawsuit was filed in Sacramento County Superior Court against the state Department of Finance, the Board of Equalization and the state controller.

Pasadena Mayor Bill Bogaard, who is the league of cities' president, defended redevelopment agencies as the most effective tool for improving downtowns and providing affordable housing.

In a statement, he said the decision to eliminate them gave too much authority to state finance officials and never required them to adopt an administrative process. In its legal filings, the state said the league was setting up roadblocks to allow "redevelopment to continue in perpetuity.''

The original idea in creating community redevelopment agencies was that property tax revenue generated within the redeveloped area would be plowed back into future developments to further improve the city.

Critics say the agencies evolved into a sort of slush fund for private developers.

City officials, who also run the redevelopment agencies, distribute the money for all manner of projects, including affordable housing and commercial ventures such as restaurants and night clubs.

As the disagreements continue between the state and its cities, the amount of general fund money the Brown administration thought it would save has fallen short of expectations.

The Legislative Analyst's Office said the administration's budget projection for the coming fiscal year assumed a $3.2 billion savings over two years from dissolving the redevelopment agencies and redirecting their revenue to local services. That's about $1.6 billion less than projected.